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The Tax Prophet Newsletter   Issue # 61 May, 2008


In This Issue:
Reporting Requirements
Financial Interest

Foreign Bank Accounts


Taxpayers must report their world-wide income from all sources, even if the income is deposited into a foreign bank account. Recently, I have received several inquiries regarding unreported foreign bank accounts.

Some accounts were opened years ago and have remained inactive; others, however, are repositories for unreported income, which could lead to additional taxes, penalties and interest, or possibly criminal charges.


Taxpayers have to file a Report of Foreign Bank and Financial Accounts, Form TD R 90-22.1. ("FBAR") when certain conditions are met. According to the Treasury Department, the FBAR's principal purpose is to gather information with a "high degree of usefulness in criminal, tax or regulatory investigations or proceedings." Further, "disclosure of this information is mandatory."

Reporting Requirements

The requirements for taxpayers with foreign bank accounts are two-fold:

(i) If at any time during the tax year a taxpayer has a financial interest in, or signature authority over, one or more foreign bank accounts with an aggregate value exceeding $10,000, each bank account must be reported by June 30 of the following year with the Department of Treasury.

Note: The deadline is June 30th regardless of whether the taxpayer's Form 1040 is on extension.

(ii) Any foreign interest earned must be reported by the taxpayer as income on Form 1040, Schedule B. In addition, the taxpayer must check the box on Schedule B, Part III, line 7a as "yes", if the aggregate value in all foreign accounts exceeded $10,000 at any time during the tax year.

Financial Interest

The FBAR requirements apply to taxpayers with financial interests in, or signature authority over (including joint accounts), or other authority over any financial accounts (such as power of attorney), including bank, securities or other types of financial accounts located in a foreign country.


Military banking facilities are exempted, as well as accounts located in the U.S., Guam, Puerto Rico and the Virgin Islands. For instance, there is no FBAR requirement for a taxpayer who owns a company in a foreign country, but all the company's financial accounts are located in the U.S.


In the case of non-willful violations, the IRS may impose a maximum penalty of $ 10,000, a significant increase from the past. Generally, IRS cannot impose such a penalty if the violation was due to "reasonable cause"; however, the taxpayer has the burden of proving reasonable cause existed.

Also, the penalty should be limited or waived when the taxpayer had no previous history of violating the FBAR requirements, the foreign account funds were not from illegal sources, the taxpayer cooperated with any audit and no civil fraud penalty was asserted with respect to the foreign account.

In the case of willful violations involving a transaction, the IRS may impose a penalty of $100,000 or 50% of the amount of the transaction, whichever is greater. In addition, there may be criminal penalties for willful violations of the FBAR requirements.


The FBAR requirements are generally not well known, are extremely broad and carry hefty fines. Expect little sympathy from Congress, since it considers the FBAR a primary tool in the fight against tax evasion and terrorism.

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All contents copyright 2008 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet is a registered trademark of Robert L. Sommers.